Servicing Trend: Better REO Outsourcing

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Now that many experts are heralding the end of the foreclosure crisis, we are seeing fewer headlines about the shadow inventory that servicers are† holding in their portfolios.

It would seem that these assets are finally living up to their name and moving back into the shadows, but in truth there is still a great deal of REO inventory on the books of the nation's servicers.†

According to CoreLogic's November National Foreclosure Report, servicers are still holding about 1.7 million homes, worth a total of approximately $256 billion. Thatís down about a quarter since November 2012, when it was estimated $348 billion worth of homes were still sitting in portfolio.

The good news is that there appears to be a new trend among servicers that sees them taking a more serious and effective approach to disposing of these assets.

Here's what we're seeing:

Servicers are driven to wind down their internal asset management operations in an effort to cut costs now that defaults are falling back to more normal levels.

But with so much REO still in portfolio, many of the servicers weíre working with today are sending more of this business to outside vendors. In the process they are raising the standards they use to judge these operations. The result has been a trend toward moving these properties back into the market as expediently as reasonably possible.

By employing the right strategies, these servicers are holding down both disposition costs and loss severity.

As you might expect, the first step for many of these servicers is to determine what portion of this work can be outsourced most effectively. Then secure relationships with outside experts who have both the bandwidth and the expertise to take on dealing with their distressed inventory.

We're seeing more due diligence on the part of servicers, possibly due to increased compliance concerns and the need to find experienced partners.

At the height of the crash, there were many smaller firms that entered the asset management business to capitalize on the influx of business. Unfortunately, many of these firms performed poorly. Had they been more effective, there would be less shadow inventory still sitting on the books.†

There are three key areas of focus for servicers before choosing outsourced partners. The first is the set of best practices employed by the outsourcing firm. The second is the outsourcer's stance on compliance. The third is the training system employed by the outsource partner.

A best practices approach to the business, built on lessons learned during the early years of the foreclosure crisis, leads to better, more profitable decisions and fewer mistakes.

Firms that donít operate on this basis make mistakes, which can be very expensive in todayís regulatory environment.

And nothing is more important to servicers today than regulatory and investor compliance. Many of the banks that are servicing their own loans do not have the compliance infrastructure in place to operate in todayís environment. Servicers are taking extra time with potential outsourcing partners to fully explore their approach to compliance.

Finally, with so many changes impacting servicers today, they are very keen to know exactly how their outsourcing partners keep their teams up-to-date on all regulatory requirements.

The best advice for REO servicers is to consider the expertise of firms that specialize in REO asset management and disposition, but thoroughly vet their capabilities.

Roger Beane is CEO of LRES, a national provider of residential and commercial valuations and asset management for the mortgage, banking, credit union and real estate industries. For more information, visit http://www.lres.com.

Comments (4)

I see a trend of REOs getting auctioned on several auction sites subject to existing tenancies, most likely previous mortgagors still occupying the properties. But many of these properties keep going back re-auctioned again, and sometimes again. Probably this is a way banks/lenders dispose their REOs and let the new owner take care of the eviction process. This is a short cut in REO disposition, but often times, it may not be very effective.

Posted by | Wednesday, February 12 2014 at 4:02PM ET

I see many trends ending and not good for the banking industry. As a front line contractor doing inspections and preservation work. the trends are not good. Companies such as safeguard want what they want and have driven prices so far down it is getting harder to get people to work for them. Now Auction. com has dropped there prices as well. the cost of living does not go down but wages do. the independent contractor's doing the work has suffered to the greed of these companies. So changes are on the horizon just not the changes you are forecasting. Chase And Wells Fargo And other Banks are Getting what they pay fore in there out sourcing. Sometimes a little common sense goes a long way.

Posted by | Wednesday, February 19 2014 at 2:40PM ET

I agree with the comments posted by Arnold and Michael. As a Texas Broker we see more and more of this happening. That as well as pools of assets being rolled out to different types of investors.Servicers, You do get what you pay for in the way of property preservation and frankly, there are times when I would prefer to use a contractor that are a bit more expensive but are more familiar with what is needed to market the property much more positive light than a really cheap one only to have to go back with another to clean up the mess that is left. Some of the contractors from nationally known service companies are really awful. As far as auctioning the property over and over again, servicers, please run your numbers and factor in your time value of money in the auctioning process. You may find, if you get a great, smaller, firm that specializes in REO of all calibers,that you may get your asset sold quicker and for more money being they can pay more (marketing)attention to the asset as well as give you more personalized service. In closing, keep in mind that in some markets it's quicker to put it on an MLS through a broker that is tied in to national sites for exposure than it is to go through an unsuccessful actioning process.

Posted by Cereese B | Tuesday, April 22 2014 at 9:15AM ET

Wow that was unusual. I just wrote an incredibly long comment but after I clicked submit my comment didn't show up. Grrrr... well I'm not writing all that over again.Anyways, just wanted to say wonderful blog!